D3: Generic business strategy

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Strategic Management Concepts

Chapter 7

Business Unit Strategies

Chapter 7: Key Issues

Generic Strategies & Strategic Groups

Porter’s Generic Strategy Typology

Miles & Snow’s Generic Strategy Typology

Business Size & Strategy

Global Concerns

Introduction

Business Unit: An organizational entity with its own mission, set of competitors, and industry.

Competitive Advantage: A state whereby a business’ successful strategies cannot easily be duplicated by competitors.

Generic Strategies: A simple categorization of competitive strategies available to businesses.

Strategic Group: Businesses employing the same generic strategy.

7-1 Porter’s Generic Strategies

Michael Porter’s typology originally included four options: low cost with focus, low cost without focus, differentiation with focus, and differentiation without focus.

Table 7-1 (reproduced on the next slide) summarizes the generic strategies presented in the text based on Porter’s typology. Porter’s strategies are in red; those proposed by others are in blue.

Porter’s Generic Strategy Typology (Red strategies proposed by Porter, blue strategies added by others)

Emphasis on Entire Market or Niche	Emphasis on Low Costs	Emphasis on Differentiation	Emphasis on Low Costs & Differentiation	Emphasis on Various Factors Based on Market
Entire Market	Low-Cost Strategy (proposed by Porter)	Differentiation Strategy (proposed by Porter)	Low-Cost-Differentiation Strategy (proposed by Porter)	Multiple Strategies (proposed by Porter)
Niche	Focus-Low-Cost Strategy (proposed by Porter)	Focus-Differentiation Strategy (proposed by Porter)	Focus-Low-Cost/Differtiation Strategy (proposed by Porter)	Multiple Strategies (proposed by Porter)

7-1a Low-Cost (Cost Leadership) Strategy (without focus)

Produce basic, no-frills products and services for a mass market of price-sensitive customers.

Often (but not always) build market share through low prices.

Low initial investment and low operating costs.

Often outsource to reduce costs.

Vulnerable to price competition.

7-1b Focus–Low-Cost Strategy

Emphasizes low costs while serving a narrow segment of the market, producing no-frills products or services for price-sensitive customers in a market niche.

Compete only in a niche where cost advantages relative to large competitors can be enjoyed.

Vulnerable to price competition.

Example: Aldi minimizes costs and offers low prices, targeting low-income consumers.

7-1c Differentiation Strategy (without focus)

Produce and market to the entire industry products or services that are readily distinguished from those of their competitors.

Emphasize scientific breakthroughs, technology, and flexibility.

Differentiation can be based on the product’s physical characteristics or other factors such as quality, marketing, or service.

Examples include specialty clothing retailers.

7-1d Focus-Differentiation Strategy

Produce and market highly differentiated products or services for the specialized needs of a market niche.

Customers in a niche might be willing to pay higher prices for specialized products or services.

7-1e Low-Cost–Differentiation Strategy (without focus)

Emphasize both low costs and differentiation.

Combination Strategy Debate: According to Porter, low cost and differentiation are not compatible in the long run, as efforts to differentiate generally increase a business’ relative cost position. Others argue that the two may be compatible, although combining strategies is usually more difficult to accomplish.

5 Ways a Business Can Pursue a Low-Cost–Differentiation Strategy

#1: Commitment to Quality

Commitment to quality not only improves outputs but also reduces costs involved in scrap, warranty, and service after the sale.

Building quality into a product can reduce the costs of rework, scrap, and servicing the product after the sale; the business benefits from increased customer satisfaction and repeat sales, which can improve economies of scale.

5 Ways a Business Can Pursue a Low-Cost–Differentiation Strategy, 2

#2: Differentiation on the Basis of Low Costs

Many firms that achieve low-cost positions also lower their prices because many of their competitors may not be able to afford to match their price level.

5 Ways a Business Can Pursue a Low-Cost–Differentiation Strategy, 3

#3: Process innovations

Process innovations increase the efficiency of operations and distribution.

Although these improvements are normally thought of as lowering costs, they can also enhance product or service differentiation.

5 Ways a Business Can Pursue a Low-Cost–Differentiation Strategy, 4

#4: Product Innovations

Product innovations are typically presumed to enhance differentiation but can also lower costs.

Example: Adding filters to cigarettes not only helped differentiate one brand from another, but it also reduced production costs.

5 Ways a Business Can Pursue a Low-Cost–Differentiation Strategy, 5

#5: Value innovations

Modify products, services, and activities in order to maximize the value delivered to customers.

Differentiate products and services only when associated cost hikes can be justified by increases in overall value and by pursuing cost reductions that result in minimal, if any, reductions in value.

7-1f Focus–Low-Cost/Differentiation Strategy

Produce highly differentiated products or services for the specialized needs of a select group of customers while keeping costs low.

This strategy combines all of the facets of low costs, differentiation, and focus.

7-1g Multiple Strategies

Employ more than one strategy simultaneously, each tailored to the needs of a distinct market or class of customers.

“Multiple strategies” is not synonymous with the “combination strategy.” A common example in airlines offering both first-class and coach seating.

7-2 The Miles and Snow Strategy Framework

Four business strategy options:

Prospectors seek first mover advantages by introducing new products and services.

Defenders seek stability and only compete in a predictable segment of the market.

Analyzers represent a middle ground between prospectors and defenders and emphasize flexibility and second mover advantages.

Reactors lack consistency and perform poorly.

Case Analysis Step 10: Business-Level Strategy

Apply both the Porter and Miles & Snow typologies.

Discuss the uniqueness of the strategy, including how it differs from competitors that might employ the same generic strategy.

Provide details

7-3 Business Size and Strategy

Small businesses tend to enjoy the advantages of speed, flexibility, and lower initial investment.

Large businesses tend to enjoy benefits associated with economies of scale.

Mid-size businesses often (but not always) struggle in terms of performance because they may lack either set of advantages.

Case Analysis Step 11: Business-Level Strategies of Competitors

Utilize at least one of the generic strategy typologies (i.e., Porter or Miles & Snow) to describe the strategies of competitors.

Draw a picture to illustrate the clustering of businesses in an industry along several generic strategy approaches.

7-4 Assessing Strategies

Although the distinctions between generic business strategies are readily made in theory, they are not always easy to assign in practice.

Formulating an effective competitive strategy is almost impossible without a clear understanding of the primary competitors and their strategies

7-5 Global Concerns

Common advice: “Think globally, but act locally.”

Key question: Should a business vary its strategy considerably from one country to another, or should consistency be emphasized?